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Generic Drug Makers See a Drought Ahead

Mylan, the second-largest generics company in the United States, has been expanding into global markets.Credit
Travis Dove for The New York Times

They call it the patent cliff.

Brand-name drug makers have feared it for years. And now the makers of generic drugs fear it, too.

This year, more than 40 brand-name drugs — valued at $35 billion in annual sales — lost their patent protection, meaning that generic companies were permitted to make their own lower-priced versions of well-known drugs like Plavix, Lexapro and Seroquel — and share in the profits that had exclusively belonged to the brands.

Next year, the value of drugs scheduled to lose their patents and be sold as generics is expected to decline by more than half, to about $17 billion, according to an analysis by Crédit Agricole Securities.“The patent cliff is over,” said Kim Vukhac, an analyst for Crédit Agricole. “That’s great for large pharma, but that also means the opportunities theoretically have dried up for generics.”

In response, many generic drug makers are scrambling to redefine themselves, whether by specializing in hard-to-make drugs, selling branded products or making large acquisitions. The large generics company Watson acquired a European competitor, Actavis, in October, vaulting it from the fifth- to the third-largest generic drug maker worldwide.

“They are certainly saying either I need to get bigger, or I need to get ‘specialer,’ ” said Michael Kleinrock, director of research development at the IMS Institute for Healthcare Informatics, a health industry research group. “They all want to be special.”

As one consequence of the approaching cliff, executives for generic drug companies say, they will no longer be able to rely as much on the lucrative six-month exclusivity periods that follow the patent expirations of many drugs. During those periods, companies that are the first to file an application with the Food and Drug Administration, successfully challenge a patent and show they can make the drug win the right to sell their version exclusively or with limited competition.

The exclusivity windows can give a quick jolt to companies. During the first nine months of 2012, sales of generic drugs increased by 19 percent over the same period in 2011, to $39.1 billion from $32.8 billion, according to Michael Faerm, an analyst for Credit Suisse. Sales of branded drugs, by contrast, fell 4 percent during the same period, to $174.2 billion from $181.3 billion.

But those exclusive periods also make generic drug makers vulnerable to the fickle cycle of patent expiration. “The only issue is it’s a bubble, too,” said Mr. Kleinrock. He said next year, the generic industry would enter a drought that was expected to last about two years. Of the drugs that are becoming generic, fewer have exclusivity periods dedicated to a single drug maker.

In 2013, for example, the antidepressant Cymbalta, sold by Eli Lilly, is scheduled to be available in generic form. But more than five companies are expected to share in sales during the first six months, according to a report by Ms. Vukhac.

Heather Bresch, the chief executive of Mylan, the second-largest generics company in the United States, said Wall Street analysts were obsessed with the issue. “I can’t go anywhere without being asked about the patent cliff, the patent cliff, the patent cliff,” she said. “The patent cliff is one aspect of a complex, multilayered landscape, and I think each company is going to face it differently.”

Jeremy M. Levin, the chief executive of Teva Pharmaceuticals, the largest global maker of generic drugs, agreed. “The concept of exclusivity — where only one generic player could actually make money out of the unique moment — has diminished,” he said. “In the absence of that, many companies have had to really ask the question, ‘How do I really play in the generics world?’ ”

For Teva, Mr. Levin said, he believes the answer will be both its reach — it sells 1,400 products, and one in six generic prescriptions in the United States is filled with a Teva product — and what he says is a reputation for making quality products. That focus will be increasingly important, he said, given recent statements by the F.D.A. that it intends to take a closer look at the quality of generic drugs. Mr. Levin also said he planned to cut costs, announcing last week that he intended to trim from $1.5 to $2 billion in expenses over the next five years.

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Mr. Levin and Ms. Bresch each said that generic companies could gain an edge by expanding into global markets. While use of generic medicines is widespread in the United States — an estimated 80 percent of prescriptions are filled with generics — they are less popular in places like Europe and Japan, although that is changing.

Mylan made a big international push in 2007, when it bought the generics business of the German pharmaceutical company Merck KGaA, and this summer it entered into a deal with Pfizer to market and distribute generic drugs in Japan.

Watson’s recent purchase revealed a similar goal. It plans to take the name Actavis, which is unfamiliar to American ears but is better known internationally.

The top generics companies have also sought to grow by going into the branded-drug business. Teva is perhaps the best example, since it sells the blockbuster multiple sclerosis drug Copaxone. But Mylan’s revenue has gotten a lift in recent years from sales of the antiallergy product EpiPen, and Watson sells branded contraceptives and other women’s health products.

Many drug makers are also going after difficult-to-make products like extended-release tablets, patches and creams in the hope that, with less competition, prices will not erode as quickly. The prices of many traditional pills drop sharply once the six-month exclusivity periods end and the market is flooded with competitors. “They have a bit better pricing power and are a little bit more durable,” said Mr. Faerm, the Credit Suisse analyst.

Paul M. Bisaro, chief executive of Watson, said when blockbusters like Plavix or Lipitor lost patent protection, they got a lot of attention. “But that doesn’t translate into profit,” he said.

Analysts said Watson excelled at this tactic. The company is expected to introduce a generic form of the Lidoderm pain patch next year after entering into a legal settlement with the American pharmaceutical company Endo. Competing companies have also tried to capitalize on difficult-to-make products, including Teva, Mylan and Impax Laboratories, which focuses on complicated products. Teva and Mylan are each pursuing generic forms of the asthma medicine Advair, which has been hard to copy because it combines two drugs that are inhaled through a device.

Perhaps the hardest drugs to copy are a newer category of products known as biologics, which are proteins made in living cells and are commonly used as treatments for cancer, like Avastin, and rheumatoid arthritis, like Humira. The F.D.A. is still setting the guidelines for how generic versions of biologics — called biosimilars — will be approved, but successfully bringing such copycat versions to market is seen as the holy grail for many generic companies.

In 2009, Teva formed a partnership with the Swiss company Lonza to develop biosimilars, and the biotechnology company Amgen is teaming up with Watson on a similar project.

“A lot of people look at biosimilars and say that’s going to be the next thing,” said Ms. Vukhac, of Credit Agricole. Her report said six of the top 20 best-selling drugs in 2013 were expected to be biologics, but the F.D.A. was not expected to issue guidelines for approving biosimilars anytime soon. Because of the significant investment required for these products, she said only the biggest generics players were expected to be successful. “No one really knows how that’s going to play out.”

Correction: December 5, 2012

An article on Tuesday about business strategies of generic drug makers in the face of fewer drug patent expirations misidentified the country in which the pharmaceutical company Endo is based. It is in the United States, not Japan.

A version of this article appears in print on December 4, 2012, on Page B1 of the New York edition with the headline: Generic Drug Makers See a Drought Ahead. Order Reprints|Today's Paper|Subscribe